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RBI Guidelines on issue of guarantees by banks

Extract of RBI Master Circular dated July 1, 2008 (a)Banks may issue guarantees favouring other banks/ FIs/ other lending agencies for the loans extended by the latter, subject to strict compliance with the following conditions.

i. The Board of Directors should reckon the integrity/ robustness of the banks risk management systems and, accordingly, put in place a well-laid out policy in this regard.

The Board approved policy should, among others, address the following issues:

Prudential limits, linked to banks Tier I capital, up to which guarantees favouring other banks/FIs/other lending agencies may be issued

Nature and extent of security and margins

Delegation of powers

Reporting system

Periodical reviews

ii. The guarantee shall be extended only in respect of borrower constituents and to enable them to avail of additional credit facility from other banks/FIs/lending agencies.

iii. The guaranteeing bank should assume a funded exposure of at least 10% of the exposure guaranteed.

iv. Banks should not extend guarantees or letters of comfort in favour of overseas lenders including those assignable to overseas lenders. However, AD banks may also be guided by the provisions contained in Notification No. FEMA 8/2000-RB dated May 3, 2000.

v. The guarantee issued by the bank will be an exposure on the borrowing entity on whose behalf the guarantee has been issued and will attract appropriate risk weight, as per the extant guidelines.

vi. Banks should ensure compliance with the recommendations of the Ghosh Committee and other internal requirements relating to issue of guarantees, to obviate the possibility of frauds in this area.

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